The RBA raised rates because underlying inflation was already strong before the fuel shock hit. Three experts on what SME owners need to understand right now.
What’s happening: The Reserve Bank of Australia raised the cash rate to 4.35% today, its third increase in 2026, taking rates back to their post-COVID high.
The Reserve Bank of Australia has raised the cash rate for the third time in 2026, lifting it to 4.35% and taking it back to its post-COVID high. The decision was widely anticipated but no less significant for small business owners already managing fuel cost surges, rising input prices, Payday Super obligations arriving on 1 July, and customers whose household budgets are under sustained pressure.
The RBA’s rationale, as outlined in its quarterly Statement on Monetary Policy, is that underlying inflation was already running hot before the Middle East conflict pushed fuel prices up sharply. Headline CPI hit 4.6% in March, the highest reading since September 2023, driven in large part by a 32.8% monthly surge in automotive fuel prices. But the bank’s view is that the fuel shock is not the primary driver of today’s decision.
What the RBA decided and why
Dr Isaac Gross, from the Department of Economics at Monash Business School, explains the distinction that matters for understanding today’s move. “While higher petrol prices have pushed inflation up, they are not the primary driver behind this move,” he says. “Instead, the key factors are persistently strong underlying inflation, evident even before the Iran-related oil shock, and a very tight labour market. Ultimately, the Australian economy remains robust, with strong demand and ongoing price pressures. In that environment, higher interest rates are the appropriate response to bring inflation back under control.”
The RBA’s own forecasts are cautious rather than alarming under its baseline scenario. Economic growth is expected to bottom out at 1.3% for the year to December and remain at that level through June 2027. Unemployment is forecast to peak around 4.7%, up from 4.3% currently. The baseline assumes the Strait of Hormuz begins to reopen within weeks, which is what most market traders are currently pricing in. If that does not happen, the RBA has modelled adverse scenarios in which growth falls below 0.5% annually and unemployment climbs above 5%, raising the real possibility of a technical recession.
The bank itself has acknowledged the cash rate is now above its estimate of the neutral rate, meaning it is actively restraining the economy rather than simply holding it steady. That is a deliberate choice, and today’s decision makes it a more pronounced one.
What it means for hiring and investment
The most immediate consequence of rising rates is the effect on business confidence and hiring decisions. Employment Hero’s data is already showing the shift in real time. James Keene, Managing Director APAC at Employment Hero, says the impact on SME behaviour is clear and worsening. “Today’s rate hike will push Australian businesses further into a defensive footing,” he says. “Our data is already seeing SMEs pull back on hiring and delay investment, as borrowing costs rise and consumer demand softens.”
The workforce data behind that observation is striking. Casual employment is growing at more than twice the rate of full-time roles, up 9.2% year on year, which Keene describes as businesses actively avoiding long-term workforce commitments in an uncertain environment. Wage growth has been flat for three consecutive months. “These aren’t just numbers,” he says. “It’s businesses making increasingly difficult trade-offs. Businesses need certainty to invest in their people, and right now, they’re not getting it. It’s a trend we can’t afford to ignore.”
For SME owners considering a hire, today’s decision makes the case for caution stronger. The shift toward casual employment reflects a broader calculation that is playing out across the economy: when the cost of a wrong decision is higher, businesses take on less risk. Full-time hires represent a commitment. Casual arrangements preserve flexibility. The data suggests most small businesses are choosing flexibility right now.
What it means for your customers
Mark Woodland, founder of Xplor, Kismet and Dwell, has been watching the ground-level effects accumulate across three consecutive rate rises. “Today’s RBA hike is the third this year, cancelling out every cut from 2025,” he says. “On the average Australian mortgage, the three hikes together have added close to $350 a month. That’s $4,200 a year, on the same loan, in the same house, with the same job, for inflation nobody at that kitchen table caused.”
Woodland’s observations from his businesses paint a vivid picture of what that pressure looks like in practice. “Families are pulling kids out of after-school care to make the mortgage, skipping specialist appointments, and refinancing onto longer loans to drop the monthly number, knowing they’ll pay for it twice over the life of the loan,” he says.
For businesses that depend on discretionary spending, those specific cuts, after-school care, specialist appointments, lifestyle services, are a direct signal of where spending is being redirected. The RBA’s own Statement on Monetary Policy noted that some household spending has shifted away from discretionary goods and services toward essentials, including transport, with a surge in electric vehicle purchases among the notable redirections.
Woodland is pointed in his critique of applying a domestic monetary policy lever to a global supply shock. “This inflation isn’t on Australian households. Petrol jumped 32.8% in March because of a war in the Middle East. The RBA is pulling a domestic lever on a problem that has nothing to do with the people copping it,” he says. The tension between Woodland’s view and Dr Gross’s assessment, that underlying inflation warranted the move regardless of the fuel shock, reflects a genuine debate about how much of the current inflationary pressure is within the RBA’s control to address.
What comes next
Market pricing currently expects at least one more 25 basis point increase, potentially taking the cash rate to 4.7%. The RBA’s forecasts are built on that assumption. For small business owners, the practical planning horizon is a rates environment that stays elevated through at least the second half of 2026, with any relief dependent on the Middle East situation resolving faster than expected and underlying inflation easing.
The May Federal Budget, which lands next week, will be watched closely for cost of living measures and any signals about fiscal policy that might give the RBA room to ease sooner. CEDA has already flagged that untargeted fiscal support risks adding to inflationary pressure rather than relieving it, which means the budget’s design matters as much as its size.
The rate rise is not the end of the story. But it is a clear signal that the environment small businesses are operating in is not going to ease quickly, and that the decisions made in the next few months will matter considerably.
Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.
